TVIX insight - response to reader question.

This post is in response to the following reader question:
Anonymous said...
Isn't TVIX for daytrading? What is the maximum time period you would hold TVIX?

March 21, 2014 at 5:20 AM

For those just tuning in, TVIX is a leveraged ETF that tracks the VIX or volatility index.  The VIX is basically a measure of options buying.  Since options are thought to be hedges against unexpected market moves, options are the market's way of indicating how much fear there is that a sudden updraft or downdraft will occur.   Of course, the market is HEAVILY weighted towards bulls right now and they are in the market on record margin.  So nobody is afraid of rapid moves to the upside. In fact perpetual upside movement is now the expectation given the Bernanke Put (federal reserve juicing the markets with money printed from thin air).

So at this point, the only fear that the VIX will indicate is the fear of markets going down.  Puts are thought of as insurance against big market crashes.  If you are all leveraged to the hilt on the long side then conventional wisdom says that you should buy some asymmetrical downside protection: you pay a small premium for an insurance policy that pays off big in case stocks collapse.  Just like any other insurance policy, chances are that you will lose your insurance premium.

With any insurance policy, there is a time component.  If you buy a life insurance policy that covers one year, you expect to pay X.  If 6 months go by and you want to sell that policy to your wife who is divorcing you and thus wants part of all of your assets, you will not be able to get her to agree to give you your original cost for it because 6 months of it have already been used.  Thus, insurance policy resale value goes down over time.

It is the same with put options (or options of any kind).  TVIX is based on shorter term maturity options.  The effect is to provide a smaller purchase premium because of the short duration of coverage of the underlying put "assets" while still having a high payoff in case of market collapse.  The downside is that the underlying assets keep expiring quickly and thus, the value of the ETF bleeds off quickly.  In fact, extremely quickly if there is no broader market collapse as you can see from the chart below.  However, the chart below also shows what kind of gains are possible for those who buy and hold through times of increasing economic stress and fear.  During the last significant market correction (July-Sept 2011), the DJIA went from ~13k down to ~10.5k.  The threat of collapse saw market participants take up a renewed interest in owning market crash insurance.  This 20% correction caused TVIX to skyrocket from 1500 to 11000 which was a massive if not temporary 733% increase.  TVIX is new so it does not cover the collapse 2007-2009 but you can imagine the gains it would have had.  I personally made 66x of my money on AIG put options.  I bet TVIX would have been up 40x.

During this time of rapid panic, it would not have paid much for people to trade in and out.  The smart money would have put in trailing stops once the panic began instead of racking up huge fees trying to day trade.  Once the herd begins to panic, it has to play out. 

I assert that there is a great depression in fear, right here, right now.  It is no different than the great depression I called in solar.  People just weren't/aren't thinking straight.  These Ponzi pumped markets are at all time highs based on nothing more than record margin debt at a time when the real economy has rolled over, jobs suck so bad that government is gaming the numbers and now the weaker players are starting to get taken out back and shot (like BBY).  Because nobody is afraid like they should be, the premium for market crash insurance is ridiculously low both in the form of options and option ETFs like TVIX.

The blog commenter repeated the common (but incorrect) wisdom that TVIX is only for day traders (which is really a statement of holding risk).  This person uses options whose spread is very high.  If you buy options and you are wrong, you do not get out cheaply!  Also, charts do not easily exist for them and so you buy based on gut feel, not EW principles or some other trading system.  There is no doubt that TVIX is highly, highly highly leveraged.  But so are options and most of them expire worthless.  Once you are in you are either going to eat a big loss for selling or you are going to ride them down to zero unless things go your way.  With TVIX you can get out cheaply using trigger points as discussed so many times in this blog.

One more thing: the characterization of TVIX as being for day traders (i.e. it contains holding risk) is not wrong.  But it is no different for ANY paper asset whose only value lies in greater fool theory.  What happened to people that held the Nikkei 225 for the long term like they were told all their lives was a smart and responsible thing to do?  Yeah, that's right, they got taught the truth: all paper assets are essentially worthless promises no matter how many stuffed shirts tell you that it is "responsible to invest" (AKA gamble) and that "your money should work for you" (AKA the big lie).  Only people can work and money certainly does not work.  If your money makes money simply by its existence and without the addition of labor then your gains were not due to new wealth creation; money was not "made".  It was simply transferred in the big poker game from someone else to you.  Sooner or later every poker game has to end.

The US markets did the same thing back in 1929-31.  Whenever you see an exponential curve in the chart you know FOR SURE that leverage is in play.  In a growing debt environment (what the con men running the show shorten to just "growth"), you want to be part of the herd.  But when the Elliott waves tell you a top is near, you should consider going to sea with The Captain who has been packing his boat for an extended offshore stay (economically speaking of course) for the past 6+ months.

The S+P chart below guarantees a collapse at some point because of the exponential nature of the moves.  The expanding triangle with throw over suggests that we are in the final stages of the debt ponzi which, when it crashes, guarantees an end to this fake, credit driven prosperity. 

My plan is to have core holdings of physical gold and silver - coins in my hand and protected by steel and lead - which, while the dollar price may go down in a deflationary collapse, will retain their buying power relative to goods and services.  Then, with a small amount of cash, I'll protect the dollar value of my personal wealth by buying and holding crash insurance in the form of TVIX as long as the chart triggers do not force me out.  In other words, I will spend as little time as possible holding this insurance while always being insured during times of maximum risk.  

I honestly should be charging people for this strategy since it is so simple, safe and actionable.  Maybe I will do so when the collapse begins because at that point the next question will be when to sell the insurance policy for max gains and that will only be known by watching the TVIX waves.  I will consider my work a failure if it does not eventually result in a 4000% (40x) peak potential gain from the bottom.  Remember, my SPWR call already resulted in a 10x gain so I do not think 40x is going to be difficult to do.  Massive gains are the reward for being able to spot value and know that it is a value when others miss the fact.  The value in SPWR was that a ridiculous Great Depression was in effect for solar because of the pump and dump by government incentives into the solar market.  It led everyone to initially believe that solar was worth a gazillion dollars.  Then when governments back off the subsidies, many big name subsidy/credit dependent solars went under (like German Q-Cells), the herd panicked the other way into thinking all solar is worthless and risky.  I simply watched the charts to determine when the bottom was closing in and then altogether in.

Likewise, the so called "Bernanke put" has replaced normal put option buying thus causing a Great Depression in the fear trade/stock insurance buying market.  This too shall pass!!  Governments cannot change reality, they can only temporarily distort it!  That's because governments do not create any value of their own, they only steal it from others like the economic parasites they in fact are.

I am holding TVIX until my triggers break down at which time it will automatically liquidate.  Since I bought low, I will not even lose any money with my current sell triggers if I get stopped out.  If it happens I will immediately begin looking for a new entry point.  I will continue ratcheting down my cost in this manner until the markets begin to collapse at which time I probably will not sell TVIX for a good number of months (until the charts tell me a major pull back is near, a break in the collapse of the broader markets).  Even then I will be wary of being out of TVIX for very long until the S+P goes below the lower boundary of the expanding triangle shown above.  If metals and miners collapse along with the broader markets I will be a big buyer of them once I think the fear trade has been revalued properly.

OK, I have hopefully saved the best for last.  It will cause some people to laugh, others to gasp.  It is not a prediction by me, but rather an observation based on EW principle.  Above I indicated that anything less than a 40x peak gain would be considered by me to be a "miss" of expectations.  In truth, it is possible that the gains could be much, much higher.  If TVIX goes from the current price to $300 then it would be roughly a 40x gain.  But in EW charting, the retracement often goes back up to the level of the prior 4th wave.  You can see the potential bounce target in the chart below which is presented using log scale.  The scale on the right is of course USD.

Retracement to the prior 4th is not an EW requirement but it is a strong guideline.  It could happen if the panic (likely in the form of serial defaults occur (i.e. "contagion").   Put options skyrocket when the panic increases rapidly per unit time.  "Contagion" (domino default) is really just another way of saying "Debt Ponzi".  In a Ponzi, the failure is built in from the start and simply hidden from the patsies until it is suddenly revealed.  Thus, the time needed for collapse to play out is very short because the defaults already occurred in reality and it is only the admission that needs to occur.  See Madoff and Charles Ponzi himself for references on this principle.  Keep in mind that Bernanke already went "all in" to save the Ponzi.  It will NOT work a second time.  Americans will begin riot, loot and yes, kill, if government tries to scam us a second time.  This is history and logic speaking.  Fool me once, shame on you.  Fool me twice, shame on me.  Rapid market collapse could also happen in case of a world war.  

If you think this kind of move is impossible for a paper asset then think again.  Look at the movement in Bitcoin.  People with a few hundred USD invested at the bottom were multimillionaires if they sold out in time.  That's just the kind of thing that happens in a pump and dump economic environment which is created by a fraudulent money supply based on the scam concepts of fiat currency and fractional reserve lending.